United States | Okun’s razor

The benefits of America’s hot economy have been unevenly spread

Unemployment rates for African-Americans have fallen farthest and fastest

|AUSTIN

“OUR ECONOMY’S on fire,” says Tamara Atkinson, head of Austin’s workforce development board. Workers there are being fought over with signing bonuses, paid internships and help with tuition fees. Ms Atkinson sees formerly incarcerated workers being given second chances, with employers asking how severe their crime really was. She even worries that wages for flipping burgers are now so high that they are pulling people away from education.

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As Ms Atkinson heard the economy humming, unemployment statistics revealed a blip. January’s figures, published by the Texas Workforce Commission on March 8th, revealed that Austin’s unemployment rate had ticked up, from 2.7% in December to 3.1% in January. On the same day, the Bureau of Labour Statistics generated some sharp intakes of breath when it revealed that in February the whole economy generated just 20,000 new jobs, far below January’s bumper haul of 311,000.

Both figures are probably statistical anomalies. Austin’s figure was not seasonally adjusted, and average jobs growth for the country as a whole over the past three months has been a healthy 186,000. “I wouldn’t interpret this as the labour market softening,” says Betsey Stevenson of the University of Michigan, the former chief economist at the Department of Labour. Rather than causing panic, these new numbers should be a reminder of both the extraordinary benefits of the recovery so far and the human cost if it falters.

The particular benefits provided by a hot economy were laid out by an economist called Arthur Okun in 1973. He argued that lowering unemployment would generate benefits far beyond just creating jobs, reckoning that it would raise a submerged iceberg, pulling people off the sidelines and into work, pushing part-timers into full-time engagements and boosting productivity. Such would be the power of a vibrant economy that it would draw people and resources towards where they could be most useful.

The experience of the past decade has confirmed much of Mr Okun’s thesis. The nature of employment has shifted towards full-time jobs, and fewer people are working fewer hours than they would like. Young women have rejoined the workforce with much more enthusiasm than men. After America’s disability rolls swelled during the recession, many feared that those leaving the labour force would never return. “Those fears were clearly misguided,” says Ernie Tedeschi, an economist at Evercore ISI, an investment bank. The share of people aged 26-55 saying that they are out of work because of illness or disability was lower in 2018 than it was back in 2008. The change has accounted for almost half of the increase in labour-force participation over the past year.

A new study, presented at the Brookings Institution almost 50 years later, tests Mr Okun’s thesis with data from the most recent recovery. It finds that the higher the unemployment rate is for any particular group, the more sensitive that group will be to the ups and downs of the economy. African-Americans, for example, tend to have higher unemployment rates than whites, and they suffered a disproportionate share of the job losses during the recession (see chart). Notwithstanding a recent wobble, they have since enjoyed a disproportionate share of the gains.

Groups with lower levels of education find themselves in a similar situation, as they too suffered a harder blow than most during the recession, and more recently have enjoyed a faster fall in their unemployment rate. For the likes of Ms Atkinson, who worries about the people flipping burgers to pay their rent, these basic measures of success are not good enough. If a hot economy pulls people into dead-end jobs, then they will fall right back out of them when the next recession strikes.

The evidence on this from Austin is mixed. According to Indeed.com, an online jobs platform, local searches for jobs such as shop assistant, warehouse worker and waitress rose by more than 300% between the end of 2017 and the end of 2018. But searches for “learning and development” opportunities rose even more quickly. Nationwide, Mr Tedeschi is not worried, pointing out that the share of people who say that they are out of work because they are in education is higher than it was in 2008, and has persistently been so.

It is possible that, as wage growth puts pressure on companies’ profit margins, they will respond by investing in productivity-boosting measures, in line with Mr Okun’s third prediction. Nicole Trimble of Talent Rewire, a consultant for companies trying to expand employment among disadvantaged groups, is doing a roaring trade for companies including Tyson Foods, a meat processor, and McDonald’s, a fast-food chain. Companies are finding they have to offer help that they used to think of as the preserve of government, such as helping workers claim tax credits or with financial literacy. Some firms are retraining existing workers when they automate, rather than firing them and hiring a new batch. Ms Trimble doubts they would be doing all this in a cooler labour market.

For all this good news, growth in Americans’ labour productivity is still slow. And past experience delivers a gloomy message about the economy’s capacity to redress structural inequalities. Another study, by Julie Hotchkiss of the Federal Reserve Bank of Atlanta and Robert Moore of Georgia State University, found that the benefits to disadvantaged groups from hot economies have tended to be smaller than their penalties in colder times. “It’s not a matter of if there’s going to be another recession,” warns Ms Atkinson; “it’s a matter of when.” If February’s jobs numbers turn out to be more than a hiccup, then those who have risen farthest will have farthest to fall.

This article appeared in the United States section of the print edition under the headline "Okun’s razor"

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